The Effect of Expected Effective Corporate Tax Rates on Incremental Financing Decisions

April 1, 1997

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Format: Chicago

Reint Gropp. The Effect of Expected Effective Corporate Tax Rates on Incremental Financing Decisions, (USA: International Monetary Fund, 1997) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper uses U.S. panel data to estimate the effect of expected effective corporate tax rates on firm’s leverage. The paper directly estimates expected corporate tax rates using rational expectations. The estimated measures of the expected effective tax rates of firms are related to a continuous measure of incremental debt financing. The paper finds that expected effective tax rates are significantly and positively related to a higher level of debt financing. Simulations suggest that debt issues would double if firms were unable to shield profits and actually faced the statutory tax rate.

Subject: Average effective tax rate, Corporate income tax, Effective tax rate, Labor, Tax allowances, Tax policy, Taxes, Wages

Keywords: Average effective tax rate, Capital structure, Compustat data, Corporate income tax, Debt-equity ratio, Effective tax rate, Financing decision, Firm i., Leveraged firm, Purposes firm, Research and development expenditure, Single tax, Tax allowances, Tax payment, Wages, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1997/046
Stock No:

WPIEA0461997
ISBN:

9781451973969
ISSN:

1018-5941

Notes

Also published in Staff Papers, Vol. 44, No. 4, December 1997.

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